Chinese growth has wide fallout

The consequences of China’s economic development for the West are being closely watched, but the impact of China’s growth for its immediate neighbours is no less important.

Over the past decade, North Asian economies that are higher on the economic value chain, like Japan, Taiwan and South Korea, have benefited from China’s low-end-manufacturing strengths.

South-East Asian economies more closely resembling China and offering similar comparative advantages have often found themselves outmuscled by their much larger neighbour.

In the late 1990s, as East Asia emerged from the Asian financial crisis, China’s rise was viewed by many of its neighbours as a potential threat, rather than an opportunity. But when economies from South Korea to Thailand revived and the regional production-sharing network matured, everyone seemed to benefit from China’s demand for specialised components and primary products.

Yet over the next decade, a split emerged in how China’s growth affected North and South-East Asian economies.

Between 2000 and 2010, Japan, Taiwan and South Korea saw their collective trade surplus with China soar from $US30 billion to $US210 billion.

The story for ASEAN countries is more complex because their resource endowments are similar to China’s. After the Asian financial crisis, countries across the region benefited as their overall trade balance with China shifted from a deficit in the late 1990s to a surplus.

But by 2009 this surplus had slowly evaporated as Vietnam and Singapore moved to significant deficits and the surpluses of other countries moderated.

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Evolving regional production patterns have affected capital flows, investment rates and wage trends in ways that have benefited some East Asian countries more than others. The more developed North Asian economies are likely to benefit the most from China’s industrialisation process because they have strengthened their position at the high end of the consumer electronics and IT product lines.

Production patterns in the region are affecting investment and labour markets in South-East Asia, thus complicating efforts to moderate widening income disparities, increase productivity and possibly escape the middle-income trap.

Real wage growth for the middle-income economies of Thailand, the Philippines and Malaysia was in line with GDP growth for much of the 1990s, but then declined or stagnated. Starting in the mid-1990s, real wages in China surged. Stagnant real wage growth and relatively low investment rates have largely been viewed as the result of country-specific conditions.

But the region’s production network has played a significant role in enabling China to pull away from its South-East Asian neighbours. With multinational firms managing decisions about where components are produced, location is influenced by the relative productivity of labour and wage costs and the logistical advantages China’s size offers.

China’s exceptional investment rates have contributed to industrial labour productivity’s estimated 10 to 20 per cent annual increases since the mid-1990s – much higher growth than its neighbours and exceeding manufacturing wage increases. Over time, China’s declining unit labour costs have put pressure on countries like Malaysia to limit wage increases.

China has been aggressively upgrading its technological capacity while its infrastructure base has solidified.

Surging energy prices and the complexities of a dispersed supply chain are also encouraging some firms that had previously outsourced components to South-East Asia to relocate their operations within China.

Both China and middle-income South-East Asian countries face the same challenge of constantly innovating to achieve high-income status.

It would seem they have no alternative but to move up the value chain.

If successful, they will eventually encroach on the domain of the North Asian trio and heighten competitive pressures in East Asia more generally.